Our sovereign ratings reflect our analysis of institutional and governance effectiveness, economic structure and growth prospects, external finances, and fiscal and monetary flexibility.
We estimate sovereign borrowing will remain high and reach $10.5 trillion in 2023, nearly 40% above the historical average before the COVID-19 pandemic.
Developed Europe and Latin America will post the biggest increases in borrowings amid stagnant growth and budgetary pressures, including from high energy prices.
Globally, we project the net cost of energy-related fiscal measures to reach a sizable $1.65 trillion in 2022-2023 (1.7% of global GDP).
Tighter for longer monetary policies will keep sovereign borrowing costs at levels not seen in the past decade, more than doubling issuance costs for advanced sovereigns and keeping them high for emerging market sovereigns.
Given the generally shorter debt profiles and reliance on foreign currency debt, the effective cost of servicing debt for emerging market and frontier sovereigns is rising fast, presenting a growing credit risk.
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After two years of recovery and expansion, we expect the world economy to slow down markedly, though the reopening of China could give a boost to our outlook.
Rising global interest rates will likely remain high through 2024, posing more risks for sovereigns heavily reliant on external funding and those with large debt stocks.
Geopolitical uncertainty, the ongoing war in Ukraine, and a polarized social context present ongoing challenges for the global economy.
While the majority of our sovereign ratings have a stable outlook, overall creditworthiness continues to deteriorate, with more than 10% of our portfolio starting 2023 with negative outlooks.
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Costly interventions to mitigate the effects of the pandemic and the Russia-Ukraine war have consumed most of European sovereigns’ remaining monetary and fiscal flexibility, leading us to introduce seven negative outlooks on developed European sovereigns last year; but the recent easing of natural gas prices and headline inflation, amid signs of resilient labor markets and demand, suggest that most euro area economies will avoid a recession this year.
READ MOREAfter a year that saw the most sovereign defaults (four) in emerging markets EMEA this century, we started 2023 with a balance of outlooks on the 55 EM EMEA sovereigns we rate that is negative by a factor of 2-to-1; however, conditions are improving somewhat as easing global inflation, a weaker dollar, and China's reopening all support a (selective) return of capital inflows into the region.
READ MOREImproving external conditions and the reopening of China are providing relief to Asia-Pacific sovereigns, and 20 of the 21 sovereign ratings in the region have stable outlooks, reflecting ratings cushions that could absorb likely pressures in the next year or so—even as geopolitical tensions, commodities prices, COVID, and inflation remain risks to watch.
READ MOREWe expect broad stability in sovereign credit in the Americas this year—with the U.S. and Canada likely to sustain high ratings despite decelerating growth and rising interest rates—but shortcomings in governance and weak economic growth could contribute to modest ratings deterioration in Latin America and the Caribbean.
READ MOREGovernments worldwide face a ticking clock as the global population grows increasingly older. Rising age-related expenditure could become unsustainable for several sovereigns amid declining fertility rates, rising interest levels, and steep government debt. In the seven years since S&P Global Ratings published "Global Aging 2016: 58 Shades of Gray," an assessment of the potential credit implications of aging for sovereign states, governments have borrowed extensively to soften the fallout on households and companies from a series of shocks, including the COVID-19 pandemic and the war in Ukraine. Meanwhile, following the trend of developed sovereigns, fertility rates have continued to decline worldwide, which has worsened most sovereigns' demographic profiles—perhaps most acutely those of middle-income emerging sovereigns.
Frequent electoral cycles and a plethora of global economic emergencies have diminished most governments' capacity to focus on the long term, even as central banks' ability and willingness to use their own balance sheets to soften shocks is elapsing. The resulting pressures on public finances—from high government debt and rising interest rates—are leading many governments to focus on the near term, and to delay contentious pension reforms until the distant future. Unfortunately, this does not diminish the problem of rising age-related spending. Indeed, the scale of the ongoing demographic transition and its likely manifold effects on societies risks becoming unmanageable if left ignored.
In the absence of policy action to cut age-related spending, the median net general government debt will rise to 101% of GDP in advanced economies and 156% of GDP in emerging economies by 2060.
In such a no-policy-change scenario, just over half of the 81 sovereigns we have analyzed would have credit metrics that we associate with speculative-grade sovereign credit ratings ('BB+' or below) by 2060, according to our simulation of hypothetical long-term sovereign ratings and credit metrics.
The pace of structural reform implementation has slowed as governments have focused on competing priorities in recent years. Yet, without continued or new policy measures, the worsening demographic outlook has increased the risk that rising age-related expenditure could become unsustainable for some sovereigns.
While in absolute terms, old-age dependency ratio and age-related expenditure are notably lower today in emerging versus advanced economies, their increase is far steeper on average than that of advanced economies, implying that the scale of the policy adjustment required to offset rising aging pressures is for now greater in emerging market sovereigns.
The Russia-Ukraine war, energy price spikes, and de-globalization are weighing on global productivity trends, perpetuating higher inflation, and increasing sovereigns' vulnerability to rate shocks.
Under our interest rate shock scenarios, the first-order effects of rising rates look to be fiscally challenging for a minority of developed market (DM) sovereigns and at least six out of 19 emerging market (EM) sovereigns.
Rising interest rates may take some local and regional governments (LRGs) for a hike, while others should be able to hunker down around low cost of debt and strong budgetary performance.
Despite the mixed bag of potential outcomes, S&P Global Ratings assumes global LRGs are unlikely to undergo material changes to their credit qualities because of interest rate volatility in 2023-2025. This general stability follows a prolonged period of historically favorable market conditions. Overall, only sustained scenarios of high interest rates would have meaningful impacts on budgetary deficits and tax-supported debt ratios.
Brazilian President Lula da Silva (commonly known as Lula) from the Workers' Party (PT, Portuguese acronym) campaigned on promises to reimplement or expand some of the social programs created during the PT governments between 2003 and 2016 and to extend the role of the public sector in the economy while tackling inflation. During the campaign, the elected president and his economic advisors provided few details on how they would implement the government agenda over the next term.
Regardless, in our opinion, a U-turn in economic policy direction is highly unlikely. Brazil's key credit strengths and vulnerabilities are structural, somewhat limiting both the upside and the downside to the sovereign credit rating (BB-/Stable/B). They include Brazil's weak fiscal position and institutional complexities; considering the country's very detailed constitution and an extensive political process to reform it will likely result in very gradual policy implementation over the next four years.
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The direct impact of cyber attacks for sovereign ratings will likely remain limited. The growing sophistication of attacks and digitalization of government operations and services could increase financial costs for governments from a successful attack.
Sovereigns with weaker governance and institutions, and less robust fiscal and external accounts are probably less prepared for cyber risks, and therefore more likely to be impacted. Cyber attacks motivated by geopolitics could be more costly and impactful for a sovereign, in our view. Governments should therefore consider increasing investment and spending to create robust IT systems and back-ups.
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